29th January 2010 - Floating Storage - One Year On
The floating storage of crude oil and clean products has been a key feature of the tanker market since early 2009. Contango play, weakened oil demand, record levels of land-based crude and products stocks, changes in regional patterns of oil consumption and very low freight rates, gave market participants a range of opportunities to play the floating storage ‘game'.
By November 2009, 149 tankers were holding 55 million bbls of crude and 98 million bbls of clean products in floating storage, enough to satisfy global oil demand for nearly 2 days. This meant that between 6-8% of the VLCC fleet and up to 35% of LR2s were tied up at any one time. These developments acted as a welcome prop to spot rates, and at times of market tightness, kept enough vessels off the market to really push rates up. Whilst this support is hard to quantify - it is worth comparing the relative fortunes of the VLCC and MR fleets in 2009. VLCC earnings on the benchmark TD3 (MEG-East) route averaged over $31,000/day last year, well above fixed operating costs. The MRs in contrast, one of the few tanker segments not utilised for storage, soberingly averaged just over $7,000/day on the TC2 (UKC-US) route, very close to operating costs.
2010 began positively with rising spot rates, oil prices and oil demand. VLCC spot earnings trebled in little over a week to a peak of $101,000/day and WTI crude rose to a 15 month high of $82.75/bbl, partly in response to extreme cold weather in the Northern Hemisphere. This meant a narrowing in the oil price contango coinciding with higher charter rates. As a consequence, a number of vessels discharged storage cargoes. However, this was partly offset by more storage tonnage being taken in the East, with the net result that the drop was less than ‘feared', with the number of tankers tied up in storage down from 141 to 119 by end January.
Given the support to rates in 2009, storage will be a key factor in determining the market in 2010. It may be that any downward pressure on tanker rates caused by re-delivering storage vessels and a return to steeper price contango with warmer weather/lower oil demand could recreate the conditions that encouraged floating storage in the first place. With current high freight rates and a shrunken contango, the ingredients don't mix well, but storage participants, having successfully played the game, will be ready to act quickly, if and when the right recipe redevelops.
